The Master Investor Podcast with Wilfred Frost and Jim Mellon

0:00I'm Wilfred Frost in London and this is the Master Investor Podcast. for anyone passionate about business and investing. We're pro-ambition, we'll celebrate success and we'll give you an edge. Join us as we learn from some of the greatest names in business and investing. Welcome to the very first teaser episode of the Master Investor Podcast. My name's Wilfred Frost. I'm a presenter at Sky News and CNBC and have had a history in finance, the markets before my journalistic career. I'm delighted to welcome you to this first episode, and even more delighted to welcome my partner in crime and regular guest to be on the podcast, Jim Mellon.

0:48Jim, great to have you here. It's lovely to be here. Tell our listeners a little bit about yourself. Okay, so I've been around for a long time in the markets, some good, some bad. And I I started my career as a fund manager, but latterly I've been basically backing companies in a variety of industries, including biotech, food, quantum computing, you name it. And one of the companies that I own is the producer of Master Investor, which is an annual show that you kindly have been involved in in a very high level way. and it doesn't make any money and I bought it out of bankruptcy but I think it is a way of democratising investment in the United Kingdom and giving retail investors in particular access to information they otherwise wouldn't get hold of.

1:37Well, Jim has undersold himself somewhat there. He is one of Britain's greatest investors and it is a real treat for me personally in our friendship to be able to pick your brain on investing And I hope it's going to be as much of a treat for our listeners in the weeks ahead to try and learn from the extraordinary experience you've built up. And as you said, you hold this annual event called Master Investor, aiming to get that information out to people. And essentially what we're trying to do with this podcast is make it rather than a big in-person annual gathering, a weekly easy to access podcast with Jim as our most regular guest.

2:20but also the great names around the world in investing and business from the likes of Jamie Diamond, Brian Moynihan and David Solomon in banking to great investors like Jeremy Grantham and Ray Dalio and hopefully some leading politicians as well from Janet Yellen to Scott besant and i think jim if there's one thing that i really want people here to gain from it's getting an edge not just in investing but in life too because some of those people if we're lucky enough to to deliver them on the podcast they have they have delivered extraordinary success in their own lives but for their clients and shareholders too and i think there's a lot that we can learn from them.

3:11Yeah, well, you have a fantastic Rolodex. You also have a great way with people. And it's going to be a fantastic combination. I've had advanced sight of some of the names that you've lined up, and they are really terrific. Everyone needs to subscribe to this podcast to listen to Wilf extracting life stories and experience and wisdom out of his early guests. And on that note, clearly, Jim, you're going to be around whenever we kind of need you. If there's big market dislocation or if there's a newsmaking interview, market moving interview that we do with a guest, Jim will be around to jump on and give us his insights and more regularly join the podcast when his views on the markets do change or not.

3:55Let's pivot to that in this teaser episode, Jim, and just get a quick snapshot of where you stand at the moment in terms of your views on the markets. A few months ago, we caught up and you were pretty bearish on the US. Since then, we've seen a sudden fall and bounce again. And we're kind of where we started with the S &P 500 year to date, essentially flat after a long multi-year bull run. What are your latest views on the US? Well, I think this is a great opportunity to sell because the US market is priced to perfection at a time when growth is diminishing and may even go negative. And it's not because the US lacks great companies and opportunities, it's because it's way overpriced relative to its economic prospects.

4:39So in a very short summary, as you know, because we talked about this, the US debt situation is very bad. The US taxes its economy at about 30 % and is spending 38%. And the Trump administration is trying to cut taxes at a time when they should be raising taxes. So the fiscal deficit is getting to be a very, very big problem. Just let's add to that, because just yesterday, Trump's tax bill passed the House, It's still got to pass the Senate, but that looks a given at this point. And what that has done is put to bed the sort of loose idea that was out there that the party, a small C conservative party in the US, had some idea and commitment to fiscal discipline.

5:22And just a snapshot for our viewers here, we talk about a deficit here of being a little bit too big. There's this 7 % of GDP. It's nearly 8 now. It's extraordinary, though. This isn't ticking it up from one to one and a half. It's unprecedented. And it's structural. So, you know, there's all Doge, you know, the Elon Musk cost cutting venture is making tiny changes to US expenditure because most of the expenditure is totally non discretionary, especially when their Medicaid is increasing because of the aging population and defense spending is increasing as well. this is a very serious situation.

5:56And you're seeing it in US government bond yields, which are now at 20 plus year highs. That in itself is dangerous, because of course, they've got to pay interest on that debt. And the interest expense is now going to be the second line in the expenditure in the United States budget. So it's really a very serious and bad situation. There's going to be pressure on the US dollar, which is overvalued. I think we know that against most other currencies. And the US equities, meanwhile, they've been up and down. They're down a little bit this year, but fundamentally, they're extremely highly priced, especially if you think there's going to be a recession in the US, which I do.

6:34So just expand on that in terms of the valuations, because at pretty much any point in the last five years, we could have said US equities look overvalued, and they've continued to march higher. Is some of this priced in already or not? I don't think so in the market. I mean, there's been a slight retreat in the big seven, hugely concentrated in portfolios, not just in the US, but across the world. There is some nervousness on the part of foreign holders of US securities, which is a very significant part of the US market. And I think we've mentioned this before, that in 1980, about 2 % of the US market was held by foreigners.

7:13Now it's about a third. So if those foreigners get worried about the US dollar or the situation in the US or the price of US stocks, and they start repatriating, particularly Japanese investors, you could see a stampede out of US stocks. So why would you take the risk? Why would you buy a market that's at 25 times earnings when you can buy the UK market, which is at 13 times earnings? And we don't have those economic risks that the US has. So touch on that, you're bullish UK stocks. I am. And, you know, I've been recommending UK financial stocks, as we did at Master Investor between us. And they've done extremely well.

7:45And they're going to continue to do well. And they're paying dividend yields of 6%, 7%, 8 % when you're getting almost nothing in the United States. And you're getting a withholding tax on the dividends as well. When you say that the UK doesn't have the same problems as the US does, surely we've got also a very high debt to GDP relative to our recent history. A deficit that's, you know, we talk about this every day at Sky News. The Chancellor's got all sorts of problems on how to balance the books. Yeah, but I think those are sort of, those are tweak problems. You know, I don't think that we've got the big fundamental thing, which is that, you know, Trump is going all out on the Laffer curve.

8:21He thinks that by cutting taxes, you're going to get this trickle down effect. It may work in the long run, but it's definitely going to cause trouble in the short term. It's going to be South American economics for a while in the United States. We don't have that here in the UK. There is a recognition that you've got to sort of begin to balance the books. also our debt to GDP ratio is lower than in the United States and our composite debt in other words if you look at consumer balance sheets is much better than in the United States you know as well as I do that in the US the typical person has almost no savings you know the typical person in the United States would have about one month of expenditure in their pocket because the elites in the US comprise one percent of the population and have over 50 percent of the wealth the concentration of wealth and the inequality in the United States is just beggars belief, basically.

9:10So the kind of final point I've got on this is so the debt dynamics in the US look terrible, bond yields are rising, and we crossed 5 % yesterday on the 30 year briefly, which triggered a few people's kind of nerves. To what extent will the Federal Reserve and the government allow that to continue? We saw that the threshold for bond market kind of disruption was pretty low after Liberation Day. We saw Scott Besson, Donald Trump reverse some of the tariffs to prevent bond yields rising too much. Does that not suggest whether it's going to be the Fed this time or Treasury, that even if bond yields should by pure market dynamics be rising in yields quite significantly at the moment, that the Fed's just going to step in again?

9:54Well, you know, if you have an alcoholic and you keep on feeding them alcohol, at some point they black out and the The alcohol has no more effect on them except that they're comatose. And I'm afraid that's a bit like what's going to happen in the U.S. economy. The Fed can step in from time to time, but its capacity to step in at the moment without generating huge inflationary pressure is limited. So I do think the Fed will try and come to the rescue at some point, but we're not at that point yet. And the government is doing the opposite of what it should be doing. It should be raising taxes, not putting on tariffs, which are inflationary, obviously, for the average American, and doing something about narrowing that gap between expenditure and revenue.

10:38And it's not doing that. It's doing the opposite. So in terms of those public markets at the moment, without broadening out to a full episode, is the call sell all US stocks, trim your portfolio in the US? What's the scale of your bearish? Well, of course, there are individual stocks in the US, which has got the broadest market in the world that are very attractive. And I've still got US stocks. I've not sold all my US shares. But the big names, I think, are fundamentally overpriced. And there will be a significant fall in the US market. Now, I can't time it any more than anyone else listening to this podcast can exactly.

11:14But I would say, on the balance of risk reward, invest in emerging markets, invest in the United Kingdom, invest in some European stocks, and you'll do a lot better over the next three or four years than if you invest in the US as a general principle. So one of the other things before we wrap up this teaser episode, Jim, I wanted to ask, and we'll do this over the course of your many appearances to come, but past investments that you've made, which could be indicative and tell a lesson to our listeners, what is the best single investment you've ever made, do you think? Well, I always think the best investments I've ever made are in friends who I have high confidence intervals in, or in myself.

11:53And so, I mean, just anecdotally, the best investment I ever made was sitting in the pub that I owned, which was a terrible investment, by the way, never invest in pubs. Where was that? The Commander. Do you remember the Commander? Yeah. And then in Notting Hill. In Notting Hill. I mean, I might as well have handed out free food to everyone in Notting Hill all year round than running that pub. But it was, I sat with a friend of mine called Steve Dattels, and I just published the original wake up book, which we talked about and master investor show, which just for those people that haven't realized it was basically you predicting the 2008 financial crisis, which you which you successfully did.

12:30Yeah, based on the slicing and dicing of housing credits, you know, and but in that book, we talked about the transition, energy transition, rather than going full tilt for windmills and solar power, to have some transition and nuclear seemed to make sense to me. So my friend Steve Dettels and I set up a company that night in the Commander pub. We put in US$50 ,000 each. Now, obviously, there was dilution along the way. But two years later, we sold it to Arriva, the French nuclear company, for US$2.6 billion in cash. That marked the top of the uranium price. And then Fukushima came along, and the uranium price, which had been $20 when we started the company, went to$140, went back down to$20 because of Fukushima and the stopping of nuclear power in Germany and in Japan and the slowdown in China and the United States.

13:23Now nuclear is going the opposite direction. It's definitely a buy in my opinion, but that was the single best investment I ever made. And it goes to show that doing business in pubs works out, but doing business via pubs doesn't work out. Well, hopefully that successful nuclear investment offset the costs in the commander, one would hope. Well, we have recorded this teaser episode of the Master Investor podcast on Friday, the 23rd of May. And we are looking to launch in full from the start of July, if not a bit before. Please do spread the word. Please subscribe to the podcast. And if you're so inclined, give us a five star review as it helps push the podcast out there and join us in full on the Master Investor Podcast from the start of July.

14:13What's interesting, Wilf, and I'd like to just say this very briefly, is that people in the UK always talk ourselves down. But we are the second largest investor in the United States. We're the second largest holder of US Treasury bonds and we're enormous investors in the US stock market. So we have a significant influence in US financial markets. London is neck and neck with New York as the biggest financial center in the world. So we're very important in terms of the direction of American markets. We've overtaken China as the second largest holder of US Treasuries. That's a very significant amount of leverage over the US situation, which is looking a bit dicey at the moment, as you know.

14:52The Master Investor Podcast is produced by Paradine Productions and Master Investor Limited in association with Birdline Media. If you've enjoyed the podcast, please subscribe and leave us a five-star review. Nothing in the Master Investor podcast should be considered direct financial advice and there's more information on that in the show notes if you'd like to refer to them.